Filing for Chapter 13 Bankruptcy
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Chapter 13 of the Bankruptcy Code is entitled “Adjustment of Debts of an Individual With Regular Income,” also referred to as a “wage-earner’s plan.” Chapte 13 is designed for an individual debtor who has a regular source of income. Most individual debtors prefer to file Chapter 13 because it enables them to keep certain important assets, such as their home, while repaying creditors over an extended period of time, usually 3 to 5 years, through a repayment plan.
In addition to allowing the debtor to keep certain assets, filing Chapter 13 stops creditors from trying to collect on debts pursuant to the automatic stay provision. The stay is called “automatic” because it does not require a court order. While the stay is in effect, creditors cannot sue the debtor, must discontinue existing lawsuits, cancel wage garnishments, and otherwise stop all types of collection activity against the debtor.
Before filing a Chapter 13 bankruptcy, a debtor must make sure he or she is eligible, i.e., the debtor’s unsecured and secured debts must not exceed the statutory maximum. It's important to check statutes to determine the current statutory maximum as the limits are adjusted periodically.The Chapter 13 case begins when the debtor files the Chapter 13 petition along with the required schedules that set forth the debtor’s financial situation and list of creditors, and the filing fee. The debtor is also required to file a proposed repayment plan along with the petition, or within a certain number of days after filing the petition.
Filing a Chapter 13 Repayment Plan
There are three classes of debt that must be addressed in the plan: (1) Priority claims; (2) Secured claims; and (3) Unsecured claims. Priority claims, such as taxes, must be paid in full under the plan. Secured debts, i.e., debts that are backed by collateral, must generally be fully paid if the debtor intends to keep the collateral. Payments on certain secured debts, such as a home mortgage, may be made over the original loan repayment schedule as long as any arrears are made up during the plan. Unsecured debts need not be paid in full as long as the unsecured creditors receive at least as much under the plan as they would if the debtor’s assets were liquidated under Chapter 7.
The Case Trustee and Creditor's Meeting
After the petition and required schedules are filed, the bankruptcy clerk will notify all of the creditors and a case trustee will be appointed. The case trustee will schedule a meeting of creditors. The debtor is required to attend the meeting. After being sworn in, the debtor must answer any questions posed by the trustee or creditors pertaining to the debtor’s finances, and will also be required to set forth the terms of the debtor’s proposed repayment plan.
Hearing on the Repayment Plan
Following the meeting of creditors, a hearing on the debtor’s repayment plan will be scheduled at which time the debtor, case trustee, and any interested creditors will appear in court. At the hearing, the repayment plan will be submitted for court approval, also known as confirmation. The bankruptcy judge must review the proposed plan and determine if it is feasible and that it meets the standards set forth in the Bankruptcy Code. Creditors must file any objections that they have to the plan within a certain time period following the confirmation hearing. The most common objection made is that the creditors would receive more money if the debtor’s Chapter 13 case were converted to a Chapter 7 case, whereby the debtor’s assets would be sold and the proceeds distributed to the creditors.
After the Chapter 13 Plan Is Approved
If the court confirms the debtor’s plan, payments will be made to the case trustee on a regular basis pursuant to the terms of the proposed plan. The case trustee distributes those payments to the creditors. If the court does not confirm the plan, the debtor may modify the plan and resubmit it to the court for approval, or may convert the case to a Chapter 7 liquidation case. Once the plan is confirmed, the plan is binding on the debtors and creditors. The debtor must make the required payments or risk having the plan converted to a Chapter 7 liquidation case.
The Discharge - After All Debts Are Paid
After all of the payments under the confirmed plan are made, the Chapter 13 debtor is entitled to a discharge. The discharge releases the debtor form all debts that were set forth in the repayment plan. Those creditors who were paid according to the terms of the plan may no longer pursue collection activities against the debtor for the discharged debts, even if the creditors were not paid in full. Under the law, however, certain debts cannot be discharged, including alimony and child support, certain taxes, student loans, and long-term obligations, such as a home mortgage.